Mortgage bill may keep states from fighting predators
State consumer advocates and attorneys say a one-paragraph amendment inserted into a sweeping predatory mortgage bill in Congress on Tuesday threatens their ability to protect the homes of low-income West Virginians facing foreclosure on illegal loans.
“Intended or not, that language would shut down most of our [predatory mortgage] cases,” said Dan Hedges, lead attorney of Mountain State Justice, a public interest Charleston law firm. “It cuts off our ability to sue Wall Street banks to get the loans voided or substantially altered.”
Mountain State Justice has saved thousands of low-income West Virginia homeowners from foreclosure since 1999. “They’re telling us we can’t go after the Wall Street banks that hold the loans and can take the house.”
Consumer advocates praise many provisions of the bill, scheduled for a vote Wednesday in the House of Representatives:
n Mortgage brokers and lenders would have to make sure the borrower can afford the loan by checking credit, verification of income, and so forth.
n They would not be allowed to insert interest rates or payments that go above a specified percent of the person’s income.
n They would have to demonstrate that refinanced loans did not contain harsher terms than the old loan did.
n Each borrower must receive a one-page sheet that spells out, in plain English, the terms of the loan.
The amendment in question was inserted Tuesday, without fanfare, as part of a 120-page amended bill.
Attorneys at the West Virginia Attorney General’s Consumer Protection division say the amendment, as written, replaces West Virginia consumer protection law with weaker federal law, taking away much of their authority to shield West Virginians from predatory mortgage dealers or regulate them.
“This is part of a pattern,” said Jill Miles, deputy attorney general in the Consumer Protection office. “Over the past decade, federal pre-emption of state authority has handcuffed the state’s ability to protect our citizens from abusive lending.”
Consumer protection staff from the attorneys general of many states held a conference call to discuss the mortgage pre-emption Friday.
“If this amendment ultimately prevails,” Miles said, “it will be one more nail in the coffin.”
“That’s not the intent of anybody who’s involved with this,” Rep. Shelley Moore Capito said Wednesday. “We certainly don’t want to shut down anybody’s course of action toward a fraudulent loan.”
Capito, R-W.Va., was one of nine Republicans who voted for the bill Tuesday. She also was part of the group that negotiated the amendment.
“There were people in that group who wanted to pre-empt all of state law,” said Steve Adamske, Communications Director of the House Financial Services Committee. “Rep. Capito resisted that.”
Capito said she was assured that state law and regulation would not be reduced.
“My understanding was that we were absolutely setting a floor and that the states would have the ability to come in and add their own rules, if they wanted to make it more stringent or a higher level.”
David Parkhurst of the National Governors Association said he doesn’t read it that way. By his read, the amendment substantially reduces state regulation of mortgages.
“If you have a federal regulatory pre-emption of state law, you’re really saying that you’re only going to have one set of eyes, the federal government, that’s going to be looking for the bad actors and the problems.
“Right now, you’ve got 50 sets of eyes. You’ve got consumer protection laws. You’ve got state unfair- and deceptive-trade-practice laws. You’ve got unconscionable-contract laws. And if you, at the federal level, decide you want to pre-empt all that when ability to repay the loan is involved, you’re losing your field team here.”
The state Division of Banking regulates brokers and a substantial portion of the lenders. “Generally, the Division doesn’t like to see pre-emption,” said Bob Lamont, general counsel. “If Congress provides a standard that’s weaker than what we have in the states and cuts back the state’s regulatory role, that’s not good.”
Friday, Rep. Barney Frank, D-Mass, chairman of the House Financial Securities committee, sent Capito a letter confirming that state laws would be pre-empted “with respect to secondary purchasers of loans,” which are usually big banks and securitizers.
State laws would be pre-empted, Frank said, only when the law is “relating to or arising out of the specific ability to repay and net tangible benefit standards set forth in the bill.”
“Well, shoot, that’s pretty much all of our cases,” Hedges said. “When is there not an ability-to-repay issue in a predatory case involving people who don’t have much money? When does a predatory loan not leave the person in worse shape?
“They’re saying, ‘Well, you can still sue the mortgage broker,’ but by the time the suit has been filed, most of them are defunct, bankrupt, disappeared. They know that.
“This amendment takes away our ability to go after the holders of the loan in any meaningful way, and they’re the ones that can take a person’s house.”
“The one who wrecked the train, who fueled this whole subprime mess, will now be exempt from liability,” said Norman Googel, state deputy attorney general in the Consumer Protection division.
The New York Times editorialized Tuesday that the amendment protects Wall Street banks by making it impossible for them to be sued.
Steven Adamske, House Financial Securities committee communications director, said it is not accurate to say mortgage-holders are not subject to legal action under the bill.
Mortgage-holders who were preempted from directly suing a national bank would have access to a process called “recission,” he said.
Under the bill’s recission process, he said, the consumer must file suit. Then if a court finds the holder liable, the holder refunds the money the consumer has paid, and the borrower must take out a new mortgage loan.
In addition, “the consumer must give back the real proceeds of the loan,” which usually involve many thousands of dollars low-income consumers do not have, said Kathleen Keest, chief counsel for the Center for Responsible Lending.
“Right now,” Hedges said, “using West Virginia law, we’re able to get these fraudulent loans voided. And we’re able to get substantial penalties from these bad actors. And because we get the mortgage-holders at the table, they have an incentive to agree to change the terms of the loans, so they’ll be affordable to people.”
Why do state laws need to be preempted at all? House Financial Services Committee communications director Adamske answered the question carefully.
“There is a necessary reason in a very, very limited way, to keep liquidity in the market and to make sure we have people who want to invest in these securities in the future, which will make more loans available,” he said.
“We are guaranteeing that — Wall Street and other people who are in this business, the secondary market, are only going to be part of this if these are good loans.”
“The industry got that language into the bill not only as a ‘Get-out-of-jail-free’ card, but also to potentially kill the bill,” Hedges said. “It’s a poison pill. Either way, they win.”
Brenda Muniz, legislative director of the national consumer group ACORN, said the pre-emption amendment is full of open-ended terms like “related to or arising out of the specific ability to pay” and “in connection with.”
Those terms leave the door wide open for banks and lenders to claim that a variety of state laws relating to ability-to-repay are pre-empted by this paragraph, she said. “It’s going to be years of lawsuits just to settle what this amendment means,” she said.
That was absolutely not the committee’s intention, Adamske said. “We wrote the most narrow preemption that was possible in doing this, and our goal is not to pre-empt state law. Our goal is to not let people off the hook.”
To contact staff writer Kate Long, use e-mail or call 348-1798.
How much are the feds pre-empting? You decide.
“Those words ‘arising out of’ and ‘relating to’ are pretty broad,” says David Parkhurst, of the National Governors
Association, on language in a mortgage-reform bill wending through Congress. “Once a bill becomes law, it’s going to be up to the courts to try to sift through that.”
The portion of the legislation
at issue is “Section 208.”
Here’s what it says.
The provisions of section 204 will supersede any state law that provides additional remedies against any assignee, securitizer or securitization vehicle, and the remedies in section 204 will constitute the sole remedies against any assignee, securitizer, or securitization vehicle for a violation of section 201 or 202 (reasonable ability to repay and net tangible benefit requirements) or any other state law arising out of or relating to the specific subject matter of section 201 and 202.
No provision of this section will be construed as limiting the application of any state law against a creditor, or the application of any state law against any assignee, securitizer, or securitization vehicle, that does not arise out of or relate to, or provide additional remedies in connection with the specific subject matter of section 201 or 202.
(Italics have been added to the legislation’s original language. “Assignees” are companies that buy or hold the mortgage.)